T-Minus Seven Hours Till Taper

The day when the Fed will begin the unwind of its latest QE program (for the fourth time) has finally arrived (as has the day when an impeachment committee will vote whether to ban Berlusconi from public office, but understandably that is getting far less press). In a few short hours the answer to all those questions of whether and how much of the taper was priced in, will be revealed. But while the Taper discussions will dominate the airwaves, as they have for the past five months, there actually were some news in the world that had nothing to do with the US Politburo in charge of capital markets and the US economy, located in the Marriner Eccles building. Here is a brief summary.

Market recap from RanSquawk

Even though stocks traded higher in Europe this morning, seemingly ignoring the looming risk event (FOMC), safe-haven assets such as CHF and JPY remained bid given the obvious risks surrounding the event. Nevertheless, financials and tech sectors led the move higher, as credit spreads tightened, supported by the release of the minutes of the ECB's money-market contact group, where Draghi told the group the ECB intends to move to simpler collateral framework when fragmentation is significantly reduced.

GBP outperformed EUR this morning, with the GBP 1y1y forward swap rate better bid after the minutes of the most recent MPC meeting revealed that no MPC member saw more stimulus needed at present and voted unanimously to keep the benchmark rate, as well as the APF unchanged. The minutes also noted that the expectations of future inflation implied by financial market prices had risen only marginally on the month. However the MPC also noted that GBP strength makes CPI slightly more likely to be below 2.5% in 18-24 months, oil may push up short-run CPI. Even though Gilt yield curve steepened following the release, B/E rates held steady at around 3.083%. Going forward, apart from awaiting the announcement from the Fed, market participants will also get to digest the release of the latest Housing Starts and Building Permits data.

Overnight headline news bulletin from Bloomberg and RanSquawk

Treasuries steady before FOMC, with decisions on rates and possible asset purchase reductions and updated economic projections at 2pm in Washington, Bernanke press conference at 2:30pm.

A drop in demand for home loans may push Fed away from tapering MBS purchases

S&P forecasts a 0.7% decline in real GDP in Eurozone this year and sees 0.8% rise in Eurozone real GDP in 2014 and 1.3% in 2015.

Wall Street banks, facing a drop in 3Q trading revenue, are counting on today’s Federal Reserve announcement to spark a surge in volume

Janet Yellen has won praise from labor leaders for fighting to put unemployment on equal ground with controlling inflation at the core of Fed policy

Bank of England policy makers voted unanimously to keep policy unchanged as an improving economic outlook prompted agreement that no more stimulus was needed, minutes of Sept. 3-4 meeting showed

New home prices in China’s four major cities rose the most since January 2011 last month, led by a 19% jump in Guangzhou, as the government refrains from imposing further curbs to cool the market

Abe’s plan to boost the economy in part by reviving the housing market and encouraging new home construction is in conflict with Japan’s demographics; its population is one of the world’s fastest-aging

The borrowing and lending of European bonds in repo market expanded this year, even as U.S. trading contracted, the International Capital Market Association said

China is concerned about the potential for volatility in the US Treasury market in the face of Fed tapering but doesn't plan to sell in a falling market and will instead continue to hold to maturity, according to government sources.

EU & UK Headlines

BoE MPC voted 9-0 to keep QE unchanged at GBP 375bln and 9-0 to keep interest rates unchanged at 0.50%, no MPC member saw more stimulus needed at present .- Rise in short-dated Gilt yields reflected US moves, better than expected UK data, possible reaction to BoE guidance.- Need to emphasise that 7% unemployment level not a trigger for higher rates.- GBP strength makes CPI slightly more likely to be below 2.5% in 18-24 months, oil may push up short-run CPI.- UK recovery at least as strong as forecast in August, Eurozone recovery stronger than expected.

Minutes of the ECB's money-market contact group says Draghi told the group the ECB intends to move to simpler collateral framework when fragmentation is significantly reduced.

ECB's Coeure said he has full confidence that Fed will conduct its exit smoothly and the ECB still needs high level accommodation in monetary policy to safeguard recovery.

US Senate Majority Leader Reid said House must act first on stop-gap government funding measure and until then the Senate is going to do nothing.

Equities

Even though stocks traded higher in Europe this morning, seemingly ignoring the looming risk event (FOMC), safe-haven assets such as CHF and JPY remained bid given the obvious risks surrounding the event. Nevertheless, financials and tech sectors led the move higher, as credit spreads tightened, supported by the release of the minutes of the ECB's money-market contact group, where Draghi told the group the ECB intends to move to simpler collateral framework when fragmentation is significantly reduced. Of note, it was reported by the Spanish central bank that Spanish bad loans ratio at 11.97% in July vs. 11.63% in June.

FX

Better bid USTs in early trade ahead of the FOMC meeting and consequent interest rate differential flows saw USD/JPY trade under pressure in London this morning. The move lower was also said to have been driven by touted ME selling EUR/JPY. In turn, the pair fell below the 100DMA line and looks set to make a test on the 50DMA line seen at 98.71. Broad based GBP strength following the release of the MPC meeting minutes saw EUR/GBP fall to its lowest levels sincemid-Jan, with GBP/USD advancing to its highest since mid-Jan and towards the key 1.6000 level.

Commodities

Saudi Arabia produces 10.03mln bpd of crude, exports 7.47mln bpd and refineries process 1.8mln bpd for July, beating its prev. of 1.67mln for June according to JODI.

China average daily crude steel output at 2.129mln tonnes during 1st-10th September, which is up by 0.48% from 21st-31st August, according to industry data.

- China is to shut 89.3mln tonnes of outdated steel capacity in Hebei, Shanxi and Shandong provinces by 2017, according to the government. Elsewhere, China will cut coal consumption and shut capacity of polluting industries in key northern cities and provinces by 2017.

Peru finance minister says the President will ask Congress next week to approve a new package of laws to untangle investments from red tape that has delayed mining projects.

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Traditionally, we round out the overnight recap with Jim Reid's prior day summary:

As we head into today’s all-important FOMC, overnight markets are trading with a cautious tone. S&P 500 futures and the USD index are both trading less than one-tenth of a percent higher as we go to print. 10yr UST yields are also broadly unchanged at 2.84%. The September recovery in the Nikkei (+2%) continues with the index up at two month highs supported by gains in the tech sector following yesterday’s outperformance of the NASDAQ (+0.75%). Other bourses including the Hang Seng (-0.2%), KOSPI (-0.4%) and ASX200 (-0.3%) are trading moderately weaker. The precious metals complex is also trading heavily in anticipation of tapering, led by gold (-1%), platinum (-0.5%) and silver (-1.4%). In the fixed income space, the bond world lost another AAArated issuer overnight with the S&P downgrade of the mining-rich Australian state of Western Australia to AA+ – a gentle reminder of the fiscal pressures facing much of the DM world. In China, there has been a lot of recent press hype about Shanghai’s new free-trade zone. A Bloomberg article says that shares of companies with the word “Shanghai” in their names, including those linked to the free-trade zone, have added US$45bn in market value since August 22nd or a gain of 27%, outperforming the Shanghai Composite by 5x over the same time period.

Yesterday saw US markets record gains for the third consecutive day. The S&P 500 (+0.42%) ended above 1,700 for the first time since the beginning of August as US equities shrugged off a sluggish European session. Technology stocks (+0.54%) were the outperformer on the day helped by Microsoft’s announcement of a US$40bn share buyback and bump-up in dividends while oil & gas stocks (+0.02%) were the laggards following a 1.7% drop in oil prices. Indeed, share buybacks were a common theme across the market yesterday with companies such Philips, DollarTree, Herbalife and AT&T announcing or reportedly considering a stock buyback. US dataflow was largely positive with headline and core CPI below expectations at 0.1% MoM (vs 0.2% expected). September homebuilder sentiment was unchanged at 58—the highest reading since November 2005 – in spite of the continued increase in mortgage rates. Interestingly, the survey of prospective buyer traffic (47) rose to the highest level since October 2005.

In Europe, Italian bond yields briefly fell back below those of Spain on Tuesday after political sources said former premier Silvio Berlusconi was likely to step back from moves to bring down the Italian government. Berlusconi was expected to strike a conciliatory tone in a video message on Tuesday but delayed it to Wednesday, according to political sources. After weeks of debate, party doves have apparently persuaded him to avoid provoking a crisis of government (Reuters).

Turning to the day ahead, the FOMC statement and the updated economic and financial forecasts will be released at 2:00 pm EDT (7pm London). This will be followed half an hour later by Bernanke’s press conference which will have a Q&A session. The Fed aside, we get more US housing updates in the form of August housing starts, permits and mortgage applications data. The Bank of England publishes their latest minutes. According to Bloomberg, an Italian Senate Committee is expected to vote on a proposal to block Berlusconi’s expulsion from parliament on Wednesday evening. But all eyes will be on the FOMC.